Nortel Execs Not Guilty In Fraud Trial

CP

Posted:
01/14/2013 10:41 am EST
Updated:
01/14/2013 12:31 pm EST

Former Nortel ceo Frank Dunn, centre, white hair, heads for the door after an SEC hearing, 2007. Dunn and two fomer colleagues accused of orchestrating a widespread multimillion-dollar fraud have been found not guilty on all counts. (FRED LUM/THE GLOBE AND MAIL) | CP

TORONTO -- The former top brass at Nortel were found not guilty Monday of falsifying financial records as part of what the Crown alleged was a widespread, multimillion-dollar fraud at the fallen Canadian technology giant.

"Therefore, I find each of them not guilty of counts one and two in this indictment.''

The verdict comes nearly a year after one of the largest criminal trials in Canada's corporate history began.

The men each faced two counts of fraud -- one count of defrauding the public and one count of defrauding Nortel Networks Corp. They were accused of participating in a book-cooking scheme designed to trigger $12.8 million in bonuses and stocks for themselves at the once powerful Canadian technology giant.

All three were fired in 2004.

(STORY CONTINUES BELOW SLIDESHOW)

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A Brief History Of Nortel

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In a way, it was economic protectionism that made Nortel come into existence. The company's history began in 1882, when the Bell Telephone Company of Canada opened a manufacturing division. It did so because of restrictions on the import of telephone equipment from the U.S.

Bell spun off its manufacturing arm into a publicly traded company in 1895. The company launched under the name Northern Electric and Manufacturing Company.

In 1914, the Northern Electric and Manufacturing Company merged with another Bell-controlled enterprise, the Imperial Wire and Cable Company, to become Northern Electric. This First World War-era photo shows women at a Northern Electric factory in Montreal.

In 1976, Northern Electric announced a new focus on digital technology, and changed its name to Northern Telecom.

The 1990s were a period of rapid expansion for Northern Telecom, which changed its name to Nortel and, in 1998, bought Bay Networks to become Nortel Networks. Speculators drove up the price of Nortel stock to astronomical levels, far beyond what the company's revenue justified, causing a stock price collapse that saw the company lose half its value in one day in October, 2000. The stock slide would continue until Nortel became a penny stock. Here, former CEO John Roth and communications VP Andy Lark answer questions in April, 2001.

On January 14, 2009, in the midst of the financial crisis and with nearly a decade of struggling behind it, Nortel filed for bankruptcy protection. Nortel had a $107-million interest payment due the next day which it could not cover. The bankruptcy left Nortel's retirees -- such as John Mlacak, pictured above -- with a severely underfunded retirement pension plan.

In 2004, then-CEO Frank Dunn, as well as execs Douglas Beatty and Michael Gollogly, were fired after the company admitted it had mis-stated some $3 billion of earnings in 1998, 1999 and 2000, and paid execs bonuses on the basis of those reports. This has come to form the foundation of the criminal fraud trial that launched on January 16, 2012, and which sees the three above-named execs facing the most serious fraud charges under Canadian law. Ex-CEO Frank Dunn is pictured above.

On Jan. 14, 2013, after a a trial that lasted a day short of a year, Dunn, Beatty and Gollogly were found not guilty by a judge who decided the charges were baseless. The prosecution was given 30 days to appeal the verdict.

While Dunn did not address the media outside court, he released a statement saying he was "grateful to have received vindication.''

"For a very long time, integrity has been the foundation of Nortel Networks' corporate governance and business practices. The documentary evidence and testimony re-affirmed this core value that I witnessed over my 28 years with the company,'' he said.

"I am looking forward to turning the page on this chapter of my life.''

Outside court, Beatty smiled and replied, "Yes, I am,'' when asked if he was happy to be moving on with his life.

His lawyer, Greg Lafontaine said the ruling vindicated his client.

"We're ecstatic with the results,'' he said. "It's a great judgment... There was no fraud at Nortel.''

At its height, Nortel employed more than 90,000 workers worldwide and was worth nearly $300 billion. During the technology boom in 1999-2000, Nortel was one of Canada's most valuable companies, with its shares peaking at $124.50.

In the years that followed the accounting scandal, the company's shares nosedived to penny-stock status amid falling sales, large debts, and a gamut of legal issues.

In 2009, Nortel filed for bankruptcy in North America and Europe, shedding thousands of jobs.

Since then, it has sold its remaining businesses piecemeal to various buyers for more than to US$7.8 billion, one of largest asset sales in Canadian history.

At trial, Crown prosecutors alleged that Dunn, Beatty and Gollogly were complicit in releasing accruals -- money set aside to cover future liabilities -- onto Nortel's balance sheets during quarters that needed to show the beleaguered telecom company was turning a profit when it wasn't.

The Crown argued that these decisions by the accused, which were kept from the board of directors and the firm's investors, generated return-to-profitability bonuses for themselves even though the company was in the red.

The defence said there was no evidence that the accused were involved in a conspiracy with countless accredited accountants from Nortel and outside auditors Deloitte & Touche.

Dunn's lawyer also told the court that as CEO, his client approved the accounting at the telecom equipment maker but should not be held responsible if the figures given to him were inaccurate.

At the time, Dunn was preoccupied with trying to save the company and trusted that the balance sheets were correct when he approved them, argued the defence.

But the Crown charged, unsuccessfully, there was blatant falsification of financial records while the accused were in charge.

In one instance, the company had $189 million in excess accruals, but the Crown argued it only released $80 million so it could boost numbers during the first quarter of that year, while holding onto the rest for use in future quarters.

It was also alleged that a year earlier, Nortel's own accountants were aware of $303 million in cash reserves that were held without a legitimate reason.

The verdict came on the same day that mediation talks on the distribution of nearly $9 billion in assets from the now-bankrupt Nortel were set to begin in Toronto.

The week-long proceedings, headed by Ontario Chief Justice Warren Winkler, are part of an effort to settle the company's creditor claims in Canada, the U.S. and around the world.

About 100 lawyers were expected to attend the talks, including those representing Nortel pensioners, disabled former employees, bond holders, trade creditors and governments.

Last April, Winkler says one of the challenges he will be facing in analyzing the proposals will be that the claims are greater than the company's residual assets.